Abstract

http://ssrn.com/abstract=2066089
 


 



Lifecycle Consumption-Investment Policies and Pension Plans: A Dynamic Analysis


Zvi Bodie


Boston University - Department of Finance & Economics

Jerome Detemple


Boston University - Department of Finance & Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Marcel Rindisbacher


Center for Interuniversity Research and Analysis on Organization (CIRANO); Boston University School of Management - Finance and Economics Department

May 24, 2012

Journal of Investment Management (JOIM), First Quarter, 2012

Abstract:     
This paper explores the optimal design of personal pensions based on the economic theory of the life cycle. It assumes that individuals derive utility from consumption of goods and leisure and that at some date they retire and stop earning income from labor. The existence of this retirement phase of the life cycle has a profound impact on optimal consumption and portfolio policy. We describe the properties of the optimal pension contract and derive the dynamic trading strategy that hedges the contract. In view of the popularity of age-based strategies — like target date funds — as default options in 401k and other defined contribution retirement plans, some of our results are particularly noteworthy. All target date funds start with a high proportion in equities at a young age and reduce it as a person ages. We identify conditions where the fraction of wealth optimally invested in equities increases or decreases over time as an individual ages. We also analyze the dynamics of pension plans, wealth and optimal policies. Distributional properties of endogenous variables are examined and the robustness of patterns to variations in parameters such as risk aversion and mortality risk is examined.

Keywords: Lifecycle finance, consumption, labor, portfolio, hedging, wealth, pension plan, target-date-funds, dynamic analysis

JEL Classification: G00

Accepted Paper Series





Not Available For Download

Date posted: May 24, 2012  

Suggested Citation

Bodie, Zvi and Detemple, Jerome and Rindisbacher, Marcel, Lifecycle Consumption-Investment Policies and Pension Plans: A Dynamic Analysis (May 24, 2012). Journal of Investment Management (JOIM), First Quarter, 2012. Available at SSRN: http://ssrn.com/abstract=2066089

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Jerome Detemple
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 353-4297 (Phone)
(617) 353 6667 (Fax)
Center for Interuniversity Research and Analysis on Organization (CIRANO)
2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada
Marcel Rindisbacher
Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )
2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada
Boston University School of Management - Finance and Economics Department ( email )
595 Commonwealth Avenue
Boston, MA MA 02215
United States
617 353 4152 (Phone)
617 353 999 (Fax)
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